2018 (1) TMI 600 - AT - Income Tax

Disallowance made u/s 14A r.w.r. 8D(2)(ii) and Rule 8D (2) (iii) - Held that - Under sub-clause (iii), what is disallowed is percentage of the numerator B in rule 8D(2)(ii). Again this is to be calculated in the same line as mentioned earlier in respect of Numerator B in rule 8D(2)(ii). Therefore, not all investments become the subject-matter of consideration when computing disallowance u/s 14A r.w.r 8D. The disallowance u/s 14A r.w.r. 8D is to be in consideration to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income. So far the disallowance under Rule 8D(2)(ii) is considered, the assessee company has proved that it has sufficient funds to invest in shares and securities, therefore, no disallowance is warranted. Therefore, we are of the view that disallowance u/s 14A r.w.r. 8D(2)(ii) should not be made in the case of the assessee under consideration because the assessee had its own funds to invest in shares and securities and some of the investments were made by the assessee in subsidiary companies for strategies purpose. Hence, we confirm the order passed by the ld CIT(A), so far the disallowance under Rule 8D (2) (ii) is concerned. For disallowance under Rule 8D(2)(iii), the assessee had suo-moto disallowed ₹ 1,05,100/-, however, we note that in order to compute the disallowance under Rule 8D (2) (iii), only dividend bearing securities should be considered. Therefore, we direct the AO to compute disallowance after taking consideration the investment which was given rise to the exempt income, that is, dividend bearing shares and securities, as per the method suggested in the judgment of REI Agro ltd. vs. DCIT reported in 2013 (9) TMI 156 - ITAT KOLKATA and the disallowance so computed should be reduced by ₹ 1,05,100/-, the suo moto amount disallowed by the assessee. - Decided partly in favour of revenue

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act read with Rule 8D(2)(ii) of the Income Tax Rules.
2. Disallowance under Rule 8D(2)(iii) of the Income Tax Rules.

Summary of Judgment:

1. Disallowance under Section 14A read with Rule 8D(2)(ii):

The main grievance of the Revenue was that the CIT(A) erred by allowing relief to the assessee regarding the disallowance made under Section 14A of the Income Tax Act and Rule 8D(2)(ii) of the Income Tax Rules. The Assessing Officer (AO) noted that the assessee had earned dividend income and claimed it as exempt under Section 10 of the Act. The assessee was asked to detail the disallowable expenditure per Section 14A read with Rule 8D. The AO observed that the assessee had disallowed only a minimal amount under Section 14A, while the AO computed a higher disallowance based on Rule 8D, considering the assessee's substantial loan funds and mixed use of funds for business and investment purposes.

The CIT(A) allowed the appeal of the assessee, noting that the assessee had surplus funds for investment and strategic investments in subsidiaries, which did not yield dividend income. The CIT(A) referenced the Punjab & Haryana High Court's decision in CIT vs. Hero Cycle Limited, which held that if sale proceeds from investment are sufficient for further investment, no disallowance under Section 14A is warranted.

The Tribunal upheld the CIT(A)'s decision, agreeing that the assessee had sufficient funds to invest in shares and securities, and thus, no disallowance under Rule 8D(2)(ii) was warranted.

2. Disallowance under Rule 8D(2)(iii):

The AO also made a disallowance under Rule 8D(2)(iii), which the CIT(A) reduced. The CIT(A) noted that only dividend-bearing securities should be considered for disallowance computation. The Tribunal agreed with this view, referencing the ITAT Kolkata's decision in REI Agro Ltd. vs. DCIT, which held that only investments yielding exempt income should be considered for disallowance under Rule 8D(2)(iii).

The Tribunal directed the AO to recompute the disallowance under Rule 8D(2)(iii) by considering only dividend-bearing securities and reduce it by the amount already disallowed by the assessee.

Conclusion:

The Tribunal confirmed the CIT(A)'s order regarding the disallowance under Rule 8D(2)(ii) and directed the AO to recompute the disallowance under Rule 8D(2)(iii) as per the guidelines provided. The appeals filed by the Revenue were partly allowed.